Carbon Credit Series – A Producer's Guide to Navigating Malaysia's Carbon Credit Maze

The landscape for carbon credits in Malaysia is rapidly evolving as Malaysia advances its commitment to a decarbonised economy [1]. Carbon credits represent a sophisticated intersection of environmental stewardship and economic opportunity, enabling businesses to meet climate objectives while capitalising on sustainability initiatives. For prospective producers –encompassing landowners, project developers, and corporations investing in climate-positive ventures – the pathway from a climate-positive venture to a marketable carbon credit is one of significant potential, yet it is laden with complexity.

This article delineates the critical considerations that producers must address to successfully develop, register, and transact carbon credits. It serves as a strategic guide to ensuring project integrity, regulatory compliance, and commercial viability within Malaysia's dynamic carbon market.

1. Defining Carbon Credit

At its foundation, a voluntary carbon credit is a measurable and verifiable representation of climate action. It is generated when a project reduces or removes greenhouse gas emissions, with one credit corresponding to one metric tonne of carbon dioxide (CO2) or its equivalent.[2] It functions as a "credit" in that it can be used to offset the emission of an equivalent amount of CO2, thereby creating a tangible asset from a positive environmental outcome.[3]

While this serves as a universally accepted functional definition, the formal legal framework in Malaysia is still evolving. Currently, there is no single, overarching legal definition for a "carbon credit" under federal law. However, proactive legislative measures, particularly in Sabah and Sarawak, have established specific legal definitions and provide important clarity for projects in those states:

• In Sarawak, the Environment (Reduction of Greenhouse Gases Emission) Ordinance, 2023 of Sarawak, which complements the Forests (Forest Carbon Activity) Rules 2022, define a “carbon credit unit” as a unit of account representing one tonne of emission reductions.[4]These units are issued by a carbon standard according to its rules and are held in a carbon registry.[5] The rules are linked to a "forest carbon activity," which is any activity leading to verified emission reductions under a carbon standard.
• In Sabah, amendments to the Forest Enactment 1968 define a "carbon credit" as a tradable instrument for both domestic and international markets.[6] It is issued by a government or an independent certification body as a permit, licence, or certificate that results from a forest carbon activity.[7] The law also defines a "carbon credit unit" as representing one tonne of emission reductions.[8]

This distinction between a functional, market-accepted definition and the emerging, specific legal definitions within state jurisdictions is a critical consideration for any prospective producer in Malaysia.

2. The Malaysian Carbon Market Ecosystem

Malaysia's carbon ecosystem is uniquely characterised by its dual engagement with both international and domestic frameworks. This structure provides producers with distinct strategic choices:

The primary actors navigating this ecosystem include:

3. The Carbon Credit Lifecycle: From Concept to Asset

The generation of credible carbon credits follows a structured and meticulous project cycle, rigorously defined by leading international standards. While terminologies may differ slightly between standards, the fundamental stages are consistent and form a coherent progression from idea to issuance [9]:

4. Core Principles of Carbon Credit Integrity

The credibility and market value of carbon credits are anchored in several universally accepted principles [10]:

5. Avenues for Commercialization

Once issued, carbon credits can be monetized through various channels including the Bursa Carbon Exchange and others:

6. Key Legal Considerations for Producers of Carbon Credits in Malaysia

Aproactive and sophisticated legal strategy is indispensable for navigating the complexities of carbon credit development and commercialization. Experienced legal counsel provides pivotal value by transforming potential legal hurdles into managed risks and strategic opportunities.

A foundational legal imperative is the unambiguous definition and securement of carbon rights. In Malaysia, land ownership per se does not automatically confer rights to the carbon sequestered or emission reductions generated on that land. Legal professionals are crucial for conducting exhaustive due diligence on land tenure, including pre-existing encumbrances or overlapping claims. This is particularly intricate in Sabah and Sarawak, where unique state land laws and Native Customary Rights (NCR) necessitate specialized local legal acumen. Parties typically enter into bespoke "carbon rights agreements" or integrate precise specific clauses into broader land use or concession agreements. These instruments are essential not only for establishing clear ownership and control over the carbon asset but also for structuring equitable benefit-sharing mechanisms with landowners and indigenous communities, thereby fortifying the project's social license and the legal defensibility of its core claims. See our article Carbon Credit Series - Key Legal Lessons from the Sabah Nature Conservation Agreement for case study on issues that arose from the Sabah Nature Conservation Agreement.

Successfully navigating state-level approvals and dynamic jurisdictional frameworks is another domain demanding expert legal guidance, especially considering the proactive legislative measures in states like Sabah and Sarawak. Legal counsel provides ongoing interpretation of these specific state enactments, such as Sabah's Forest (Carbon Activity) Rules and Sarawak's Forests (Forest Carbon Activity) Rules 2022, alongside its Environment (Reduction Of Greenhouse Gases Emission) Ordinance, 2023. Additionally, the Sabah State Legislative Assembly recently passed the Forest Enactment (Amendment) Bill 2025 which introduces a regulatory regime over carbon credits activities in the state. This involves advising on the precise scope of mandatory licensing, assisting in the preparation of comprehensive applications to state authorities, and ensuring project plans meticulously comply with conditions relating to state revenue sharing or local benefit reinvestment. Such proactive legal engagement allows clients to anticipate regulatory shifts and maintain steadfast compliance.

The strategic structuring of the project entity itself profoundly influences long-term liability, taxation, governance, and access to finance. Legal advisors assist in selecting the optimal legal vehicle—be it a Special Purpose Vehicle (SPV) to isolate project-specific risks (including long-term liabilities like permanence failures), or a Joint Venture (JV) requiring meticulously crafted shareholders' agreements. These agreements must clearly delineate capital contributions, profit and carbon credit revenue distribution, robust governance protocols for project oversight, and incisive dispute resolution and exit strategies, all tailored to the unique nuances of carbon asset management and optimized under Malaysian tax law, inclusive of any applicable green incentives.

The commercial actualization of a carbon project often pivots on expertly drafted and negotiated Emission Reduction Purchase Agreements (ERPAs).These are not standard commodity contracts but highly specialized, bespoke agreements. Legal professionals are indispensable in structuring terms that strategically allocate a wide array of complex risks, including price volatility, credit delivery shortfalls, adverse changes in law or carbon accounting methodologies, and liability for potential credit reversal events. This involves tailoring clauses on credit specifications, conditions precedent to payment, robust representations and warranties concerning credit integrity and exclusivity, and effective default and remedy provisions, thereby securing the producer’s revenue streams and adeptly managing counterparty vulnerabilities.

In an era of intensifying scrutiny regarding environmental claims, maintaining ESG disclosure integrity and rigorously preventing the double counting of emission reductions is critical for corporate reputation and market credibility. Legal counsel advises on harmonizing a project's carbon credit transactions with broader corporate sustainability reporting obligations, such as those mandated by Bursa Malaysia or aligned with international frameworks like the TCFD and ISSB. This includes ensuring that contractual terms within ERPAs unequivocally delineate usage rights and effectively preclude the producer from inadvertently or otherwise making misleading environmental claims about emission reductions that have already been sold, thus mitigating greenwashing risks and potential legal challenges.

Furthermore, given that carbon projects typically demand substantial upfront capital, optimising project financing and establishing robust security interests are key concerns. Legal advisors play a pivotal role in enhancing a project's "bankability" by ensuring that all foundational legal elements—including unequivocally established carbon rights, requisite permits, and bankable offtake agreements like ERPAs—are sound and meticulously documented. They guide clients through the complexities of negotiating term sheets and loan documentation with financiers and undertake the often intricate legal work of creating and perfecting security interests over project assets. This may involve addressing novel legal questions concerning the use of future carbon credit streams as collateral, within the evolving parameters of Malaysian law.

Finally, while meticulous contracting aims to pre-empt disagreements, the long operational lifecycle of carbon projects necessitates strategic and effective dispute resolution mechanisms. Legal counsel advises on, and drafts, tailored dispute resolution clauses in all critical project agreements. This typically involves considering multi-tiered approaches (e.g., good-faith negotiation, structured mediation) and, where necessary, binding arbitration, often specifying appropriate institutional rules and a suitable legal seat, such as the Asian International Arbitration Centre (AIAC) in Malaysia, to ensure that any emergent conflicts can be resolved efficiently and with commercial pragmatism.

Conclusion

The endeavor of becoming a successful carbon credit producer in Malaysia offers profound environmental and economic dividends. However, this path is intricately woven with multifaceted legal and regulatory considerations. Engaging experienced legal counsel proactively, from the earliest stages of project conception, is not merely a defensive risk mitigation tactic but a crucial enabler of sustained project success. By astutely navigating the legal terrain, prospective producers can develop robust, credible, and commercially viable carbon credit projects that contribute significantly to Malaysia's ambitious climate objectives and the broader global transition towards a sustainable and resilient economy.

[1] Malaysian Green Technology and Climate Change Corporation, 'Corporate Malaysia drives low-carbon transition' (6 December 2024) https://www.mgtc.gov.my/2024/12/corporate-malaysia-drives-low-carbon-transition/

[2] Legal High Committee for Financial Markets of Paris, Reporton the Legal and Regulatory Aspects of Voluntary Carbon Credits (16October 2024) https://www.banque-france.fr/system/files/2024-11/Rapport_66_A.pdf

[3] Ibid note 1.

[4] Section 2, Environment (Reduction of Greenhouse Gases Emission) Ordinance, 2023 of Sarawak.

[5] Ibid note 4.

[6] Sandra Sokial, ‘Mandatory licensing for carbon trading activities in Sabah after Forest Enactment amendments’ The Star (Kota Kinabalu, 17 April 2025) https://www.thestar.com.my/news/nation/2025/04/17/mandatory-licensing-for-carbon-trading-activities-in-sabah-after-forest-enactment-amendments

[7] Ibid note 6.

[8] Ibid note 6.

[9] UNFCCC, 'CDM: Project Activities' https://cdm.unfccc.int/Projects/diagram.html

[10] Integrity Council for the Voluntary Carbon Market, 'The Core CarbonPrinciples' (ICVCM) https://icvcm.org/core-carbon-principles/

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